Successor Liability

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February 21, 2022

by a searcher from Harvard University in Middletown, CT, USA

Theoretically an asset sale (vs stock sale) should eliminate successor liability however assuming you are taking over all assets, employees, office, equipment as well as keeping on most management and ownership as well as contracts partially completed how do you continue to keep the transaction arms length?

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Reply by a searcher
from The University of Chicago in 85 Broad St, New York, NY 10004, USA
An asset sale does not necessarily eliminate successor liability.

As a general rule, the buyer of assets in an asset acquisition does not automatically assume the liabilities of the seller. However, in certain circumstances, the buyer can be held responsible for liabilities of the seller if a court determines that the factors of one of the following exceptions are met:

The buyer expressly or impliedly assumes the liabilities.The transaction is deemed a de facto merger under state law.The transfer was fraudulent or intended to defraud creditors.The buyer is a mere continuation of the seller.The buyer continues essentially the same operations or product line of the seller.

Read more here: https://www.ballardspahr.com/insights/alerts-and-articles/2020/06/the-art-of-the-bad-deal-successor-liability-in-m-a-transactions
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Reply by a professional
from University of Minnesota in Minneapolis, MN, USA
It would be interesting to see how often successor liability claims make it as far as district court. Of course, any such findings would miss all the early settlements as a result of a few nasty letters, and my guess is the vast majority of filings in district court never reach any kind of public resolution....but outside of any kind of data-based research like this, everything is anecdotal. The reality is, depending on the type of claim, in litigation a good plaintiff's attorney is going to fire shots at every possible target they can potentially squeeze a dollar out of, so regardless of the merits, successor liability lawsuits are a real possibility.

That said, I've never seen or heard of one firsthand in my 12+ years of practice - (take that anecdote for what it's worth).
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